High natural gas prices have allowed Canadian producers to drill smaller prospects and to target unconventional resources that used to be considered uneconomic, resulting in a reversal of the production declines last year. Analyst Thomas Driscoll of Lehman Brothers is predicting a 1.5% increase in Canadian natural gas production this year, “a vast improvement from the decline of nearly 3.5% experienced in 2003.”

As of September, the industry completed 30% more natural gas wells than over the same period in 2003. “After suffering from large production declines in late 2002 through the end of 2003 (due in part to declines at the Ladyfern field), the industry appears to have been able to reverse the trend,” Driscoll said last week in an equity research report to clients.

Canadian production growth has been sustained over the last three quarters. “We estimate that production will be up almost 1.5% this year over last year’s levels,” he said.

Net exports to the United States as of Nov. 30 were up 3% compared to the first 11 months of 2003 when there was a 13% annual decline. “We estimate that net exports will be up almost 2.5% for the full year 2004 vs. 2003 levels,” said Driscoll. “Our 2004 estimate of 8.6 Bcf/d is down slightly from our previous 8.7 Bcf/d estimate.”

Nevertheless, initial well productivity remains weak in Canada, down about 60% from 1996 levels, according to statistics from Canada’s National Energy Board (NEB). In a recent report on the Western Canadian Sedimentary Basin, the NEB estimated that the industry will need to increase drilling to 17,900 gas wells by 2006 from an estimated 15,600 wells in 2004 just to maintain production levels. The NEB estimates that first year decline rates are averaging 21% for new wells.

“Longer term, gas volume growth may be dependent upon the industry’s ability to develop the vast unconventional reserves that exist in Canada,” Driscoll said.

The NEB predicts that coalbed methane (CBM) will be the fastest growing portion of Canadian natural gas resources over the next two decades, representing more than 3 Bcf/d by 2025 compared to 75 MMcf/d at the beginning of this year. CBM is expected to reach 450 MMcf/d by the end of 2006. NEB estimates that there is 182-553 Tcf of gas in place within Canada’s coal seams.

“Companies such as Burlington Resources, Canadian Natural Resources, Devon Energy and EnCana are targeting long-life tight natural gas resource plays in western Canada,” Driscoll said.

Meanwhile, Atlantic Canadian production “continues to suffer,” he added. Production offshore Nova Scotia currently comes from four fields that make up the Sable Offshore Energy Project. “Despite the recent start-up of the Alma field in December 2003 at 120 MMcf/d, production offshore East Coast Canada is down about 35% from its peak of 555 MMcf/d reached in December 2001,” Driscoll said. “It is also down almost 20% from December 2003 levels.”

An additional 125 MMcf/d of Sable production is expected to come from the South Venture field in early 2005, according to the NEB. Meanwhile, EnCana is beginning new exploration around its Deep Panuke prospect, which would yield 400 MMcf/d if brought online (see related story).

EnCana is still in talks with the Sable producers to possibly tie in its Deep Panuke production to existing Sable facilities in an attempt to “salvage the discovery,” Driscoll said. The project currently is considered uneconomic because its 1 Tcf of reserves at 400 MMcf/d of production would be inadequate to support a 20-year pipeline agreement.

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